Shock

In the previous column, I wrote about the factors underpinning the sharp spike in world crude prices. That was when prices last Tuesday climbed up to what was an unprecedented level of $37 per barrel.

The very next day, however, crude oil prices shot up even further to touch $44 per barrel. With demand remaining unabated, analysts are now seriously looking at September price levels climbing up to $50 per barrel.

We seem to be staring at an oil price shock that no one anticipated.

If previous instances of oil price spikes are illustrative, the present price regime could at the very least dramatically slow down global economic growth. Worse, it could push the global economy to recession just at a time when we were all expecting sustained expansion.

The Philippine economy defied projections rather heroically, posting a GDP growth rate in the first quarter of well over 6 percent. That is heroic, indeed, considering that we estimated growth for that period to range between 5 percent and 5.5 percent.

Now that growth is threatened.

The latest figures show that our inflation rate nudged up to 6.2 percent – significantly above earlier projections. A major reason for that is rising oil prices.

Economic Planning Secretary Romulo Neri admitted, the other day, that the full-year inflation figure could be higher than expected. This is because oil prices are expected to remain at the presently high levels.

The oil price shock did not seem to have been considered in the calculations of our economic managers. In fact, shortly before Congress opened, President Arroyo issued an order raising taxes on petroleum products. The additional tax rate – one of the measures intending to contain our worsening fiscal situation – would take effect as soon as oil prices began climbing down.

That is not likely to happen anytime soon.

To compound things, higher oil prices means, for us, a higher oil foreign exchange bill since nearly all of our oil is imported. That will harm our balance of payments picture and put pressure on the peso.

That is bad news.

Only a few weeks ago, analysts were predicting that the peso will gain substantial ground owing to the passing of political uncertainties and the expected strong performance of the Philippine economy. Now, that sounds more like wishful thinking.

We seem to be standing on the brink of a vicious cycle of higher oil prices, larger import bills and a weakened currency. That could push up the inflation rate higher than what our economic managers are willing to imagine at the moment.

In tight situations, such as what we anticipate now because of the unexpected spike in world crude prices, the agitators of the Left are likely to seize the opportunity to organize street protests and advance populist calls that will only have the effect of further skewing our fiscal picture.

There seem to be more factors coming into play to make the oil price picture more disturbing.

We had mentioned in this space sometime ago the China factor: a surging oil demand coming on the heels of years of very high economic growth. China’s increasing oil consumption, running much higher that an already impressive growth rate because of suppressed consumer demand, is adding significantly to the unpleasant situation where total world demand for fossil fuels is hovering close to existing production capacity.

The tense and uncertain situation in Iraq is an aggravating factor. Iraq, a major oil producer, seems to be teetering on the brink of civil war. That could threaten a major production base.

Yet another factor is the stockpiling currently being undertaken by the northern industrial economies in anticipation of winter demand. Since total global oil demand is very close to total world production capacity, the stockpiling is putting great upward pressure on oil prices.

And yet another factor that must be mentioned is the uncertainty over the fate of Yukos, the mammoth Russian oil producing company. Yukos owes the Russian government billions in back taxes which Russian president Putin is bent on collecting – to the extent of sending over army troops to the main Yukos office last month.

If Yukos is forced to cough up the taxes it owes the Russian government, spokesmen for the beleaguered corporation are warning of imminent bankruptcy. Given the tight supply of oil worldwide, that prospect is not helping oil prices relax.

The interplay of all these factors will keep oil prices high in the foreseeable future.

And as I mentioned in the previous column, there is little likelihood that oil prices will ever go down to the low levels we enjoyed just a while back. This is because the surging global demand for oil, a non-renewable energy source, will continue to push very close to production capacity.

If the shock of high oil prices is not managed well enough, it could harm our economic growth prospects, keep poverty levels high and fuel much social discontent.

Government seems to have been blindsided by this unholy development. But it should not be paralyzed by the challenge.

To begin with, our people must be told the bitter truth: we will never ever again return to a cheap oil regime. A dramatic change in our lifestyles is in order.

And then there is the more pleasant truth: in these difficult circumstances, the Philippines continues to have among the lowest pump prices in Asia. This is because – contrary to the mindless agitation of leftwing groups – we maintain the lowest taxes and keep the most incentives for the oil industry.

Lastly, there is the larger truth: we desperately need to see a plan that will dramatically alter our energy mix and significantly reduce our dependence on non-renewable fossil fuels. This should have been done yesterday. But it was not.

And so there will be a long and painful gap between this period when oil prices rise sharply and that period when we shall have built alternative energy sources. A gap – hold your breath – that could last 15 years is we start now, longer if we drag our feet and fall into the usual paralysis we exhibit in the face of unexpected difficulties.